TSLA - Porsche AG: Strong Growth Points To Resilient Demand

2023-11-07 18:23:45 ET

Summary

• Porsche reported solid earnings despite slowing global growth in the luxury market, driven by higher deliveries.
• Porsche saw sales grow by 12.6% to 30.13 billion in the first nine months, while operating profit rose 9%.
• Porsche's management expects a stronger second half of the year and maintains full-year revenue guidance, with a focus on electric vehicles.

Overview

Dr. Ing. h.c. F. Porsche AG ( DRPRF ) operates as a subsidiary of Porsche Automobil Holding and reported solid Q3 earnings amidst a global slowdown in luxury spending.

Since its $85 billion spinoff from Volkswagen in 2022, shares have dropped roughly 25% from all-time highs, as the global luxury market saw a slowdown due to slowing post-pandemic growth, in particular in China. Nevertheless, shares of the luxury sportscar maker, which is particularly known for its Carrera 911, have recovered as the company reported solid earnings.

Porsche AG reported strong business figures in the first nine months leading up to Q3 2023, as sales increased by 12.6 percent to 30.13 billion euros while operating profit rose by 9.0 percent to 5.50 billion euros. Deliveries to customers also saw a significant increase of 9.6 percent.

The all-electric Taycan sports car continued to perform well, with deliveries growing by 11 percent. Despite challenging macroeconomic conditions, Porsche remains confident in its forecast for the current financial year and aims for a Group operating return on sales of more than 20 percent in the long run. The top seller was the model 'Macan', which saw a 31 percent increase in deliveries.

For the full year, Porsche AG, projects sales revenue of €40 to €42 billion, an automotive net cash flow margin of 10% to 12%, and an automotive EBITDA margin of 25% to 27%. It expects its battery electric vehicle (BEV) share to be in the range of 12% to 14%.

Valuation

Unlike Ferrari ( RACE ), which focuses predominantly on the high-end, high-margin sports car segment with a business model that emphasizes exclusivity and branding, Porsche's lineup is more diverse. It includes not only high-performance sports cars like the 911 but also luxury SUVs such as the Cayenne and Macan, and the electric Taycan, all of which target slightly different markets and price points.

Ferrari cars are typically priced much higher than Porsches due to their exclusivity and performance focus. A new Ferrari's average price often exceeds $300,000, with some models starting around $215,000 and special editions soaring past $1 million. In contrast, Porsche offers a wider range of vehicles, resulting in a lower average price . A new Porsche may range from about $60,000 for entry-level models to over $200,000 for high-end versions, bringing the average price for a Porsche to roughly $100,000 to $150,000.

Despite this diversity, Porsche is known for maintaining high profitability. The brand's ability to sustain high EBITDA margins, exceeding 20%, speaks to its operational efficiency and strong brand premium, which allows for higher pricing power.

Overall, Porsche generates one of the highest gross profits per unit sold:

1. Ferrari : Around $80,000 - $100,000 per vehicle
2. Porsche : Approximately $17,000 - $25,000 per vehicle
3. BMW : About $5,000 - $10,000 per vehicle
4. Mercedes-Benz : Roughly $5,000 - $10,000 per vehicle
5. Tesla : Roughly $6,000 - $9,000 per vehicle (dependent on the model)
6. Audi : Approximately $3,000 - $5,000 per vehicle
7. Lexus : About $2,000 - $5,000 per vehicle
8. General Motors (Chevrolet, GMC, Cadillac) : Approximately $2,000 - $5,000 per vehicle
9. Ford Motor Company : About $1,000 - $4,000 per vehicle
10. Toyota (including Toyota and Lexus brands) : Approximately $1,500 - $3,000 per vehicle
11. Honda : Roughly $1,000 - $3,000 per vehicle
12. Nissan : About $1,000 - $2,500 per vehicle

As Ferrari generates roughly 4 times the gross profit per unit sold, it certainly deserves a higher valuation since the business is more capital-light, which means that its earnings will likely grow quicker in the long term. However, at nearly 50 times forward earnings and 10 times Price to Sales (P/S), I believe that shares may have gotten too far ahead. Since its IPO in 2015, shares are up nearly 500%, as the company saw strong earnings growth as the global population of ultra-high net worth individuals continues to grow.

Nevertheless, Mercedes Benz ( MBGAF ) and BMW ( BMWYY ) trade at a much lower valuation of just 4 times and 5 times earnings, respectively. However, Mercedes and BMW's gross profit per unit are also just 1/4 that of Porsche's which explains the valuation gap. It should also be noted that Porsche has grown its earnings-per-share much quicker than Mercedes. Here, Porsche grew its EPS more than threefold from $0.5 in 2016 to $1.6 in 2022, compared to Mercedes, which grew its EPS from $8.7 in 2016 to $14.3 in 2022. Thus, I believe Porsche deserves its premium valuation going forward.

Takeaways

Porsche's strong earnings underscore the resilience of its brand, with revenue growth despite a challenging luxury market. However, the company faces increased costs due to delivery shortages and higher marketing expenses, particularly related to a sluggish Chinese market. Additionally, there are concerns that Porsche's shift to electric vehicles may pose risks to its brand identity. Despite these challenges, if the current positive trends persist, Porsche's earnings could continue to rise over the next decade, potentially driving up its stock price.

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